Qs KOP Update

Continuing with my review of Qs non-correlated forecasting systems, here's a look at the Qs KOP, or Qs Kit of Parts. The KOP is actually a composite of several systems and a review of the original post will help newcomers understand the code and the underlying logic. The KOP was the product of about 4 months work and I continue to value it as part of the Qs Dirty Dozen.
It's been almost a year since the original post and the equity curve is still chugging along with a couple real zingers on the downside.
Trades 100-105 were, eh, terrible and one good argument for some type of calamity stop loss, although the equity curve recovered to parity by trade 110.
Equity growth has been zippo since trade 130 and I intend to review each trade in turn to determine possible root problems for that situation. Breaking news as I figure them out.
Part of the problem with the KOP is the lack of robustness on the long side entries. The short side entries demonstrate a lot more robustness and as part of future refinements to the KOP I intend to add more non-correlated entry signals fro the double 33s, big gulp and % VIX advantage systems profiled recently.

Happy Trails Lite (IWM)

Here's a version of the Happy Trails system applied to IWM for the original backtest period of 5-1-03 to 9-12-08. I call this the "Lite" version as I've removed the stop loss and breakeven stop floor conditions that created so many false starts . . . but which also created an exceptionally low intraday drawdown risk. The only change I've made to the coding is to add alternate exit "OR" conditions consisting of fixed bars. These conditions actually fire in a consistent pattern and help smooth out the equity curve.
The performance report is shown below..................

And below are the same settings applied to the current date or about 11 months more.

The system yields a consistent equity curve with only two pullbacks over the 5 year period.

Below is the distribution graph of trades showing the scarcity of losing (and winning) outliers which suggests to me that the system manages to contain a relatively high probability trading range.

As usual this is a work in progress and many other variations of this simple theme come to mind for system refinement and improvement. Feel free to share your investigations.

Happy Trails Stop Fx

This is a follow-up to Monday's post on the Qs Happy Trails system and the use of the TradeStation "breakeven stop floor" (BSF).

Monday's system parameters set the BSF at $4, which admittedly seems unrealistically tight at first glance.

The spreadsheet above identifies all the metrics of using a $ 4-20 BSF range and demonstrates the types of tradeoffs between total risk exposure and net system returns that can be realized by incrementally pumping up the BSF.

Ultimately, a BSF of 5 yields the optimum net profit.

When I backtest these systems I test in increments of 2, so the setting of 4 posted with Monday's results reflects the advantage of using 4 in lieu of 6, as 5 was not considered as part of the backtest.

Hairy Bottom Lesson

Behold the power of the hairy bottom! This is GE on 1 minute bars and a picture perfect hairy bottom setup dead on the PP pivot at 10 minutes into the market.
The hairy bottom resolved above the PP at 9:43, accompanied by a parabolic BUY signal.
The trade got some additional confirmation from a VXN cross at 9:45.
The NYAD MAs are upslope from the open and the parabolics fire a BUY at 9:46.
I've warned previously against putting too much stock in NYAD parabolic signals until after the first 30-45 minutes, but in this case I liked the way the NYAD was riding above the double 8s channel, and entered the trade.
This was a real quickie as GE shot for R1 at 10:00, at which point all the technicals started to deteriorate. . and I closed the trade.
Total time in trade was 18 minutes and the net gain was only $.12, but I followed my trading plan signals so I've no regrets.

Qs Happy Trails Revisited

This is a cleaned up version of an earlier series of systems I termed Happy Trails. Run through the posts on the IWM and the Qs to view the logic and various stops applied, including the effects of pyramiding.

For this version I've changed the entry/exit signals to fire "Next Bar at Market" as opposed the previous "at close". Perhaps surprisingly, this slight change produces a nice little net gain. I've also reduced the inputs from 3 in the original Qs version back down to 2 as in the IWM system.

This system trades a lot. . .125 trades in 5 years, or a trade every 2 weeks, but as you can see from the performance report the actual average holding time is only 2-3 days.

Reviewing other performance metrics I've discussed previously, the max consecutive losers is rather astounding, as is the max consecutive winners. The max intraday drawdown is also impressively low.

Now, before you start deploying all your capital to this little gem there are a couple things to keep in mind.

First of all there are 2 stops conditions in place. One is a breakeven floor stop. . .set at $4, and the other is a stop loss (both long and short sides) set at $90. All trades are 100 share positions and they are tracked frictionlessly....meaning no commissions or slippage applied.
The net result of the $4 breakeven floor stop is that we get a lot of trades that go nowhere. . . as reflected in the flat period of the equity curve shown below. Nevertheless, there are a number of simple conditions that can easily tone down the trade frequency and reduce the equity chatter.

The trade distribution above shows the predominance of winning trades.

And, for the backtesting critics . . . I've taken the system time parameters and moved them ahead 11 months to the current (shown below).

Performance levels continue along the same track and the equity curve has shown a marked jump (not shown).

Thanks to Vimal for questioning me about Happy Trails and forcing me to investigate its nuances in more detail.

TS2000i code is shown below. The breakeven floor stop and stop loss conditions have to be added independently to the system parameters.

The Opening Range Fibs

Here's a quick look at another overlay that I frequently use when I'm looking for intraday trade confirmations. As I mentioned previously, I find Monday's the most difficult day of the week to daytrade as positions get rebalanced from Friday's close and, especially after expiration Friday, things can get a bit squirrelly as called positions get reset.
In the spirit of Mark Fisher's The Logical Trader I wait for the first hour and then run fib lines from the current low to high. The fibs help sort out the odds for momentum moves when the pivots have not been hit and can support breakout/breakdown moves from the pivots.
In today's scenario the first hour range defined by the white vertical line set the 0% line fib about 30% above the PP pivot.
#1. . at 11:18 the parabolics fire SELL off both the R1 and 100% fib line.
#2. . the NYAD also fires a parabolics SELL
#3. . the MAs slope of both the Qs and the NYAD continue downslope
#4. . Qs reach and breach the 0% fib line, BUT ARE STILL 30% ABOVE PP.
#5. . With the NYAD still downslope, this is my confirmation to stay the trade and not cut and run.
#6. . Qs barely kiss the PP at 13:30 (not shown) and I'm out of the trade.
In summary, a smooth trade with a clear short entry and an exit at the target pivot. A $.38 move in 132 minutes. . . longer than I like to be exposed, but it looked like a trend day and the odds favored riding it for a while.

More Signal Confirmations

Here's one more example from Wednesday of what I look for intraday on the Qs.
This one turned out a bit better than the Tuesday trade.
Today we're looking at 2 minute bars, which is actually the time frame you need to monitor to catch the VXN crosses in real time.
Looking at the VXN crosses in hindsight alters their relative position on the chart due to a change in scale dynamics as time progresses: the greater the time frame lookback, the greater the distortion of the actual cross.
#1 . . At 11:50 the Qs are sitting mid point (actually dead on 62% fib line)
#2 . . The parabolics are on a BUY and the VXN crosses at 11:50
#3 . . The 3 MAs are upslope and the MACD histogram is above the zero line and rising
#4 . . This is a low risk entry given the Qs relationship to the pivots and I enter long with the PP as my first target (line of resistance).
#5 . . The Qs blow through PP in only 14 minutes, run a little spill over and the parabolics fire a SELL (cover) at 12:18, at which point I exit the position.
This was a quick little trade, just 28 minutes. I actually added another BUY lot to the trade at 11:58 since it's my experience that this type of momentum (greater than 60 degree slope) and close proximity to the next pivot will drive price to that level.
I exited both positions at 12:18 and am off for the rest of the day.

Double 3s and the IWM

This is a continuation of my earlier post on the Double 3s for the Qs.
In this case I've applied the system to the IWM for our demonstration backtest period..
.....A little aside here.....
About 10 years ago when I first got into systems trading INTC use to be the poster child for technical alignment. (also see CSS Analytics). TradeStation used INTC heavily to promote the "reliability' of their systems and to demonstrate how easy is was to make money using simple algorithms. Times have changed. And I personally find IWM to be a superior index for testing trading concepts in lieu of the DIA, SPY , Qs and any individual stocks. So, the next logical question is.."Why not just trade the IWM?"
The answer is that the Qs offer certain features that I prefer and I actually find it easier to make money with the Qs than the IWM. That doesn't mean I ignore the IWM. In fact, I watch it with the same 2 minute scrutiny that I watch the Qs and I'll explain why and in future posts.
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For the time being, an application of the Double 3s yields a respectable equity curve. I've used a 6 period fixed bar exit BUT, and this is a big but, there is no "MarketPosition=0" in the code so the system will stop and reverse if a contrary signal fires ahead of the 6 day fixed exit. The net result is that the average number of bars for winners is only 2. The other net result is that this is a very active system with 201 days in 29 months, or about 1 trade every 6.5 days.
As mentioned in the original 3x3 post one thing I look for is the max consecutive losers both long and short, and this system generates some acceptable returns.
The max intraday drawdown is twice as stiff for the longs and the shorts, possibly reflected the short bias for most of the test period and the tendency of the market to drop faster than it rises.
The trade breakdown shown below shows that a simple stop loss of $200 could improve net return and cull out the losing outliers.
Keep in mind that this version of the double 3s is a work in progress and just part of a larger trading concept that I've been exploring since May of 2008, that is, using a small basket of systems to trade a small basket of ETFs.
And while the post may generate as many questions and answers. . . to me that's what its all about.

Playing Well with Others

Dr. Brett had a recent post suggesting the value of more vertical and horizontal integration among financial bloggers. So far so good.
This was followed by a number of subsequent blog posts discussing blogger cooperation, information sharing and the value of critique versus respect. I'm not going to posts all the links. If you're a regular visitor to this site all you have to do is flick over to the Sites of Interest on the right side of the blog and flip through the archives of a few quant sites to know what I'm talking about.

Unfortunately, a good deal of that blog traffic has gone not vertical or horizontal . . but ballistic and basically off the grid, becoming argumentative, even combative, with a few unfortunate and emotional comments emanating in the form of personal attacks and worse.

And while I can't question the intent or altruism of anyone else who blogs, I can just say for myself that I feel real dismay at these recent developments.

I write this blog and read other blogs because I'm trying to become a "better" trader without letting my ego get in the way or trying to give anyone a hard time. I'm not trying to "one up" any other bloggers and here's a news flash . . . I don't even give a rip about how many folks tune in to my site. If my posts can help one struggling trader make a go of it . . I'm happy. I'm not trying to sell a CD, a book, a training course or generate revenue from an ad stream. Any revenue from the one ad that I run goes directly to a Rescue Dog program that I help underwrite.
That's just me.

My posts are as much for my benefit as any readers. I use the blog as a kind of trading journal and those who have followed me for the last year know that I'm willing to share what I know and not afraid to own up to a few bonehead moves along the way. Hey! It's a learning process.

Now some of you are going to say, "Geez, the old farts's been trading for 25 years . . hasn't he got his act together yet?" The answer is, "Well, Yes and No". The markets are not static. Knowledge is expanding (I'm going out a limb with that one), trading algorithms have become the norm, spreads have narrowed, program trading creates momentum never imagined 10 years ago and the retail trader, whose trades account for only 3% of daily volume, has to be sharp, clever and quick to make a buck. Those that don't (or won't) adapt and fail to find a trading niche and an edge are at risk, whether they know it or not.

I often liken my ongoing trading education to that of a gold miner. I'm always looking for a few nuggets, trying to avoid the Fool's Gold and worked out veins. . and always with the illusive vision of the Mother Lode somewhere in the hopeful distant. In reality, I'm happy to pan for flakes and make a consistent, if modest, daily return for my efforts.

The "nuggets" I refer to are often found in the blog postings of my Sites of Interest and others. And, if you have an inquisitive mind, you keep digging because you never know when some tidbit of trading knowledge will pay off big time. Ditto for the various e-magazines and free seminars that are offered by E-Signal, Telechart, ISE, CBOE, TradeStation and many other companies. You never know when you're going to find one of those nuggets or meet a fellow miner who will turn out to be a great trading resource, mentor or friend. All you've got to risk is your time.

Now, I mention all this because of a series of posts by CXO. Most notable is their "Guru Grades"

This is not meant as an endorsement or critique of any of the "gurus". But the notable metric about the grades is. . . well. . . how bad they are. I mean, really, these are the best and the brightest and this is the best they can do? It's humbling and scary at the same time. So before you plunk down your hard-earned bucks on any of these folks, keep in mind this is what you can expect as a return.

Fast forward to blogdom and the forecasting value of (mostly) free advice and technical analysis.

While I'm going to risk possible censure and assume that we're all posting with the best intentions, the bottom line is it's up to you dear reader to check your pickings and reassure yourself that you're on the right trail. So don't be too quick to criticize and condemn. Just move on and keep on digging. . . maybe you'll be one of the lucky few who strike it rich.

And in that spirit, here's another old post from CXO that might add to your grubstake.

Signal Confirmations

In contrast to Tuesday's go nowhere chart I thought it might be instructive to look at the types of "signal confirmations" that I mentioned were needed to trigger a trade for me.
This is Tuesday's chart of the Qs 5 minute bars and the green vertical line is our long trigger.
#1 . . the NYAD is showing a little breakout to the upside while the 3 MA signal line (3,7,14) remains solidly upslope.
#2 . . the parabolics are on a BUY on the NAD and we're well into the day at this point (11:12 pst) so the first hour caution about following the parabolics on the NYAD has been passed.
#3 . . the VXN has just crossed through the Qs price chart. These are what I call VIXEN trades and they have a very high success rate, although seldom picking absolute short term tops or bottoms.
#4 . . Qs are just breaking the R1 pivot resistance. I actually waiting until 11:15 take the trade as I wanted to see even more conformation that the Qs were going up.
#5 . . Qs are on a parabolic BUY signal
#6 . . Qs are riding nicely my double 8s channel (8 MA of the high, 8MA of the low) this is very bullish.
FOR THE EXIT..................
Overall market momentum was a bit iffy Tuesday so I was prepared to bail on this trade at the first sign of failure. That occurred at the red vertical line when. .
#7 . . Both the NYAD and the Qs parabolics fire SELL (or cover)
#8 . . Both the NYAD and Qs prices fall into the double 8s channel
This turned out to be a case of premature exit and only netted a lousy .06 so I should have stuck with it until 11:48 when I could have netted another .08.
It's a learning process.
But . . I followed the trading plan signals and the next time I may give the trade a little more room to breath. Maybe not.

Standing Back

While it's easy to look at yesterday's Qs action in hindsight and see the futility of any momentum trades, the fact is clues were there all day long that it was going to a slow grind to nowhere.
One of the problems with relying on daytrading to provide the bulk of your nut is that you've got to ride momentum and carve out whatever you can on the intraday swings. This tactical approach to trading can produce a kind of trigger-happy attitude that really needs to be contained in order to avoid the otherwise frustrating whipsaws that can test a trader's patience and sanity.
And then there are days like yesterday . . . which I consider a high-risk throw away for day traders. In the chat room the guys are always on the lookout for the breaks, either up or down, and the goal is to get multiple technical confirmations before jumping into the tar pit.
But this wasn't a down trend day. . .this was just a down day.
And the clues were all there to show that this was going to be a rough one for any buyers.
#1 . . the NYAD. It never got above .12. Without this prime indicator showing some strength there was literally no hope for a rally. The NYAD is my chief forecaster for market momentum and I watch it closely on 1 and 5 minute bars all day long.
#2 . . the VIX. Shown as an overlay on the Qs chart, there was never any time during the day when the VIXEN cross over pattern (see right blog panel) was even a possibility. These are low risk trades and without some momentum towards a cross momentum has to be regarded as dead.
#3 . . the underlying technicals. The 3 moving average signal was flat as a pancake both in the Qs and the NYAD (actually the Qs were slightly downslope most of the day).
#4 . . the ambiguity of the Qs parabolics signal. When you see this type of ebb and flow parabolic signal the safe course of action is to stand back until it gets resolved. The trick is you never know which way it will get resolved so patience is the best risk management tool you've got. Use it!

Qs MACD Signal Line

Today we re-visit the MACD Signal Line, originally posted on March 4, 2009. The original test period was 10/07 - 3/09 so I've moved the test period forward and backward 6 months to reflect the 3-26-07 to 8-6-09 test period we been playing with for the past 10 days.
I've reset the inputs to 3,14,3,2,10. And, when I tested these inputs on the original test period the return was actually as good as the March 4th settings.
Interestingly, this new expanded timeframe backtest actually confirms my previous 3,14,3 MACD settings. Sometimes I surprise myself!
Equity curve is shown below and while the returns aren't dramatic, keep in mind that I'm actually more concerned with maximum intrady drawdown and max consecutive losers. In that respect the system has some attractive performance features.
Pyramiding has not been turned on. . .I'll get to that in a later post.

Below is the distribution of the actual trades and it should be immediately apparent that system performance can be improved by culling out the outliers losers and a good percentage of other losers, by simply setting a $125 stop loss/trade. The performance report is based on 100 share positions of the Qs, whose value has fluctuated during the test period, so an alternate approach would be to use a 4% stop loss.

Friday Vixology

It's been over a week since we looked at the VIX and Qs charts with the LR30 lens, so this is the update as of Thursday's close. Clearly, a lot has changed as the LR30 channel had formed a new paradigm on both the VIX and the Qs.

Both charts are in technical alignment and remain bullish for the markets. With the new orientation of the Qs LR30 mean slope and the position of the MACD technicals the Qs look poised to hit the next overhead support level at 41.25, which was suggested last week . . . and then . . . .?

This view, of course, is in conflict with many experienced technicians who see a rolling over in momentum on the major indices and who are projecting an already long overdue retracement. For now, I'll just go with the day to day flow until we see that LR30 mean turn downslope.
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While I'm off for the rest of day on some family business, here are three articles to tease your trading brain and share some of the best current thinking on dynamic equity curve switching, mean reversion and implied statistical correlations.
These are all themes that I've (very) briefly touched on in recent posts, but the collective output of this little brain trust provides insights and perspectives well beyond the abilities of this old trader and should pique' the interest of every inquisitive mind. Check em' out.
Jeff Pietsch - Equity Curve Switching
Michael Stokes - Short-Term Mean Reversion
Don Fishback - Statistical Correlation

Qs Big Gulp Bars

This is an update of my earlier post Qs Engulfing System, sometimes known as the big gulp.

For comparison sake I've used the 3/07 - current time frame that we've been playing with for the past week.

The inputs have been kept the same as the original and, as with the original, pyramiding has been turned on producing a net 4x position (both long and short) at various times .

The original test period was 10/07 to 2/09 so we've moved the current test period forward 6 months and backward 6 months.

Performance results are impressively similar with no fade-off shown in recent trades as has been the pattern with several of the other systems profiled recently.

This situation alone makes a good argument for giving credence to the candlestick signals provided by the system and supports the case for engaging non-correlated entry signals in building a basket trading system.

This is a very simple setup using a default TS algorithm (see code in original post above) and results can be improved with use of a trailing and/or breakeven stop.

Although the system doesn't generate a large net gain is does reflect several attractive features:

. .Balance between long and short trades

. .Low drawdown (especially considering max position is 400 shares at some points)

. .Max consecutive losers is 3 or less

. .Abbreviated exposure time (average is 4 days for winners, long or short)

Although there is some differential returns between the longs and the shorts (68 vs 78%) this is probably reflective of the dominate bearish trend of the test period.

Qs Meet the Double 3s

As I try and get back on track exploring some notions about systems development and testing, I thought I'd first switch horses. . .off of the SPX and onto the Qs. I don't trade the SPX or SPY for a number of reasons. I understand a lot of folks do and swear by their technical alignment characteristics . . . I'm not one of them.
I got a little sidetracked over the past few days on the VIX % Change system and the subsequent Topticker post, but now I'm headed back to the barn and saddling up the Qs as I get down to business with refining (hopefully) this 3x3 system.
Bear in mind these upcoming posts are a work in progress and may end up a complete fiasco so as long as your expectations are as modest as mine we may all come out of this OK.
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Per the above Qs performance report I've optimized the Qs Double 7s for the same arbitrary time period used for the SPX on Monday. The optimized settings returned are 3,3,5,9. Now, don't send me nasty emails or comments saying I handpicked the time frame. . .I didn't. . .and in future posts I'll suggest some signals that optimization has become curve fitting and that input variables need to be reconsidered.
Keep in mind that our ultimate objective is a system with only a few variables that can utilized as a timing model not only for swing traders but for day traders as well using a variety of intraday time frames.
For the time being we'll focus on the daily bars . . . and I find it somewhat remarkable that the first 2 inputs defining the higher highs and lower lows entry thresholds are the same as the SPX : 3 and 3. This leads me to suspect a higher correlation between the SPX and the Qs than I had considered earlier. At the same time, the fixed exit bars for the Qs optimize at 5 & 9, whereas for the SPX were 9 & 10.
Given that the SPX system made 174 trades and the Qs made 197 trades in the same time period this was somewhat to be expected.
The other interesting data generated by this study was the optimized period of 9 days for a short position in the Qs.
The 9 day fixed bar short position has been generated by over half of the Qs Dirty Dozen systems that I've profiled even though they are based on a non-correlated basket of entry conditions, so I think this is a valuable number to file away when trading the Qs short.
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In addition to the system development questions mentioned on Monday two more of extreme importance to me include:
What is the time exposure of each trade and how much time is capital at risk?
For my own account, the larger the size of the capital pool at risk, the shorter the targeted time frame I prefer. Which is one of the reasons that daytrading is my preferred MO and where I focus my risk and why my swing trading is focused on lower risk premium decay and hedged strategies. Again . . . just my comfort level. . .you may have a completely different (and completely legitimate) risk tolerance level.
Is there a balance between long and short trades?
If the system trades 80% long then I'm likely to question why and look closely to see what happens in down markets and why no corresponding short signals are generated. This long/short balance will come into play in future posts as we explore how periodic resetting of the system variables can produce a dynamic market timing model without compromising risk exposure. . . and those last 4 words are the key.

Net gains of the Qs 3x3 start out slowly on the equity curve, picking up momentum until trade 47 (12-27-09)when equity begins to turn negative and continues down until 2-15-09 when the system starts to kick in again. It then requires another 2o trades to bring the equity curve back into parity with the 12-27-09 level.

TopTicker vs VIX Advantage

After Friday's post on the VIX % Change Advantage I received a number of comments suggesting that the use of the VIX may not really provide any advantage in determining the momentum of the SPX and, after a series of comment exchanges, TopTicker provided some code to test.
Normally I don't do reader requests, my workload is quite full already, thank you very much. But I'm a practical and inquisitive kind of guy, a Capricorn by birth, and my first response to any such query is "show me the code!'.
Now I understand that some bloggers are reluctant to post code, either because they think somebody will steal it and make a gilzillion dollars and they won't get any residuals or any number of other reasons. I have no such reservations. On the downside I have noted with some dismay that some of my dirty dozen systems have been offered on a number of sites as monthly fee based systems. Of course, I was never contacted, offered any revenue split or acknowledged as the author of the code. That's the world we live in. Some eagles and some bottom feeders.
Sorry for the digression.
Nevertheless, I wanted to test TopTicker's hypothesis and ran a backtest of the exact same time frame using only the SPX and the entry TopTicker provided.
I used the same exit signals and the same inputs.
The results are shown above.

Now, to give the system a fair chance, I re-optimized the inputs, which yielded a 9,2 setting as opposed to the %VIX settings of 9,5.
Those results are shown above and reflect a much improved net return.
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The equity curve shown below reflects the re-optimized 9,2 inputs, and does amazingly well until trade 70, which corresponds with Feb, 4 ,2009.
Obviously there's been a basic change in the trading paradigm subsequent to that period as 14 of the last 17 trades have been losers.
Keep in mind that this is an incredibly simple system and we could obviously control the drawdown with a variety of stops and checks.
That being said, a simple "do the opposite" approach to the SPX does appear to merit further investigation . . . which at this juncure I will leave to TopTicker, Michael and others to investigate.
I also highly recommend checking out Jeff Pietsch's spin the DV-2. Jeff is a thinking man's quant whom I am honored to call a friend. He also runs a chat room frequented by a few other notable bloggers and his fee based products IMHO are a exceptional value at 5x the price.

The TopTicker TradeStation 2001 code language is shown below for those that want to fiddle with it some more. Let me know how it goes. . . .

SPX Meets the Double 3s

This is a version of the original Qs Double 7s system. The big difference is that I've applied (and optimized) the inputs for the SPY to cover the time period explored in Friday's VIX % change study.
Michael (an analytical trader and blogger that I greatly respect) had been critical of that post, suggesting that asset correlation studies are inherently flawed and fraught with other difficulties. And I'm willing to admit that may be so . . . to a point.
First of all, trying to forecast anything the markets will do is an exercise that frequently requires the patience of Job, the wisodm of Solomon, and otherwise tests the limits of of one's sanity and capital account.
That being said, it's my intent to explore Michael's contentions in the near future.
Until then. . . .
The systems that I've posted on this blog are part of a research project begun back in May 2008. That project was intended to develop a basket of non-correlated systems that could be used to trade a small basket if stocks. I originally called the project KOP (Kit of Parts) and 2 deliverables from that research were the KOP10 for the IWM and the Qs KOP.
The idea was that by using non-correlated variables such as RSI2, the Detrend, standard deviations, MA crosses, linear regression, candlestick patterns, day of week, relative beta and a few others that a trading model could be produced that would work in both up and down trend markets and in both trading range and trending markets.
This was obviously an ambitious endeavor and I'm grateful for the input and suggestions that the on-going project refinement have elicited.
In the process of developing the KOP component systems I asked myself several questions:
What is the goal of the system?
It is designed as a stand alone system or part of a larger market timing package.
Does the system offer a unique timing perspective on the market?
Are the buy/sell signals in sync with other non-correlated timing models, or does the system offer opportunities to capture trades that might otherwise not be apparent.
Does the system offer unique risk exposure controls?
As I've mentioned many times on the blog, capital preservation is Job #1 in my book and the metrics that I consistently look for in evaluating system performance rank maximum drawdown and max. consecutive winners/losers more so that total net return.
Maybe not your ideal trading plan, but it works great for me. That's just my comfort level.
Does the system provide consistent trade confirmations of other non-correlated systems?
If it does deliver consistent confirmations then I feel a lot more comfortable risking my money using both it and the other related systems in the basket.
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There are lots of other questions that I ask myself in the process of system develop and testing, but these are a few of the biggies.
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Which brings us to today's post.
As with Friday's post, this is jumping off point, not a final destination, so bear with me over the next few days as we explore the potential profits and pitfalls of a simple system that sells a series of recent highs and buys a series of recent lows.
See the exact Tradestation code language by linking to the original Qs 7&7 system above.The optimized settings for the SPX over the specified time period are (3,3,9,10), meaning the system sells and buys 3 day highs and lows and holds 9-10 days. No stops and no other money management controls have been applied.
Were we to test other time frames, we might expect different optimized settings, both for entries and for exits and that one parameter we examine in future posts.
Connors original version of the system included a 200MA entry filter, which I have deleted in an attempt to increase trade frequency and total net return.
In future posts I'll look at several possible system refinements including:
Pyramiding the entries
Optimizing over a variety of time frames and what those differences might mean
The use of alternate exits (OR conditions)
and perhaps most importantly for me. . .
Ways to contract the drawdown

VIX % Change Advantage

Soggy bottom in the Qs today after first hour should have warned you we were going up!!!
And now for something completely different. . . . . .

One thing that's caught my attention for a while is the daily % change in the VIX relative to the major indices, including the Dow, SPX and NDX.
I've noticed a tendency for exaggerated VIX moves to foreshadow subsequent short term trends in the indices and here's a simple little study to validate my intuition.
I choose to make the indices the target of the trade rather than the VIX since, by it's very nature, there's considerably more daily noise in the VIX than in the underlying indices.
That format almost makes it easy to test alternate indices performance relative to the VIX.
Simply put, the system sells the SPY if the daily % change in the SPY is greater than the daily % change in the VIX, and then exits the position after a fixed period. Vice versa for the sell side.
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A 65% percent profitable return may not seem very impressive, but this is a very simple system and easily improved by adding entry filters such as a % change threshold, an MA trend, etc., as well as exits conditions, trailing stops, etc.
Those improvements could also improve the drawdown and consecutive winners/losers ratio. . . 2 of the most important metrics that I consider when evaluating a system.


And, as always, keep in mind that these studies are not meant to be canned solutions but rather jumping off points for your further exploration. That's one of the reasons they're free. The equity curve really begins to take off around trade # 20, which was initiated on 12/27/07 which is reflective of the beginning of the bear paradigm. Were we to rerun the data backtest with this as out start date, the results would be improved considerably without any further code modications.

Below is the TS 2000i code with the fixed bar exits optimized for the SPY. In future posts I'll look at some of the other indices, add a few filters and some other tweaks. So far this simple approach looks very encouraging for both capturing short term gains and creating a probability model for short term direction.

Qs Lazy B Revisted

This is a followup to Tuesday's post and the use of linear regression lines and slopes to help time market momentum.
TopTick had noted in the comments that it looked like both of the faster slopes had to cross the slower slope concurrently and questioned the validity of such an approach.
Above is the TS chart of the 6 trades showing exactly how the entries and exits transpired.
Even though the inputs for the long and short sides were somewhat different, the trades essentially resolved into a switch and reverse context.
Keep in mind that this study was only intended as a tangent to Michael's investigations and reflects just another attempt on my part to develop a basket of systems (begun back in May of 2008) to forecast market momentum and direction in an effort to protect my longer term capital positions.
While some may find fault with the execution on the system, the trades (and minimal drawdown) speak for themselves.
After Tuesday's post I reran the system with pyramiding turned on (shown below), which effectively increased the total number of trades to 18 and increased net return almost 300%.
I also made the system a pure switch and reverse and adjusted the inputs to 10,12 and 44. It turns out that the system performs almost as well with only the 10 and 44 inputs so I have to question the need for the confirming second fast slope crossover and will explore that further as time permits.
The big negative with the pyramid approach is that by scaling in to the trades you're ultimately committed to a 500 share position at various points, thereby increasing your overall risk exposure substantially. The plus side is that much of that extra capital is not exposed for the same period as in the original study.
This then becomes a matter of comfort level with the reliability of the system and the willingness to capitalize it. From my own risk management perspective I would focus on the original system and use others such as the 3 Finger Lead and Reverse systems for trend confirmation before adding capital to the original position.
The 3 Finger systems have proven robust in both up and down trending markets and those that lurk around the Market Rewind chat room where I hang out a few days a week, know that the intraday signals of the 3 Fingers have proven to be consistently reliable forecasters of the Qs short term direction.

Tippy or Toppy

Here's an update of today's daily charts of the VIX and Qs as of 1 hour pre close.
The charts continue with the theme developed last week and offer few technical clues as to likely near term developments.
Overall, the VIX trend continues down while the Qs trend continues up. Today's open provided solid overhead resistance and for those that follow the new daily high counts and low counts, it was obvious that the field is getting thinned with a few notable exceptions such as CIT, AIG and C . . with a modest 1.5 billion shares traded.
The SPX (not shown) has shown a real affinity for the 1000 level for 3 days now and the break up or down is likely to be substantial.
With Thursday providing the greatest historical probability as a pivot high day we may yet see another push up before a fade of substance.
The markets continue to confound mean reversion and counter trend traders and I have no regrets about going to 95% cash last week for my longer term positions.
The one position I'm still holding, GE, continues to melt up although I'm prepared to exit as soon as the upslope trend looks at risk.

LAZY B Trading the Qs

Michael Stokes had an interesting post the other day regarding the use of a 5-10-20 EMA crossover timing model to follow the Nasdaq trend (long only).
Being the inveterate tinkerer that I am, I utilized a similar concept using the cross and confirmation of linear regression slopes to see how well they tracked the Qs trend.
Turns out they track it pretty well.
I use somewhat different settings for the long and the short side because the short side tends to be more volatile and hence reflects a shorter time frame to complete.
There's not a lot of trades here. . . 6 in 4 years and the time in the trades is off the scale for my normal comfort level. . . 110 days for the longs, 200 days for the shorts but, what's truly amazing to me is the piddling drawdown that this system incurs considering the length of the exposure.

Equity curve shown above, reflecting the relative gain in each of the trades.
Not a loser in the bunch.
Not sure I'm ready to bet the farm on this simple timing model, but certainly worthy of further exploration for smaller time frames and the application of various filters to increase trade frequency and, hopefully, net return.
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Below is the TradeStation 2000i code.
TS users with versions 8.3 and above know the BUY/SELL and EXIT command language requires minor modification to run properly.

Monday VIXology

As we cross into SPX 1000 territory today, the VIX continues to confound most traditional technical analysis by posting gains.
And, while it would be easy to dismiss this statistical anomaly as the product of underlying put buying there's another approach to using the VIX that I've profiled many times before and it works even when the VIX is acting out like an unruly child who refuses to behave.
We're looking at a 2 minute chart of the Qs with the VXN overlaid as a line (white) study.
Below the Qs chart is a chart of the NYAD on a similar time frame with the VIX overlaid.
In the top chart I've used the red and green trend lines to reflect the VXN implied momentum of the Qs.
In the lower chart I've used the red and green trend lines to signify the trend of the NYAD.
Note in particular the VIX/VXN crosses generated at 13:00 in both the Qs and the NYAD.
These crosses will always keep you on the right side of the trend and help avoid those otherwise frustrating whipsaws that can easily drive a trader to distraction.
Just another setup to log into your technical trading toolbox.